Benin
Second Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver of a Performance Criterion: Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Benin
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International Monetary Fund
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Publication Date:
21 Jun 2007
eISBN:
9781451803495
Language:
English
Keywords:
ISCR; CR; government; poverty evaluation framework; strategy; SDR; government disengagement; reiterated commitment; authorities' goal; government saving; government sector; Current account balance; Current spending
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The staff report for the Second Review under the Three-Year Arrangement under the Poverty Reduction and Growth Facility (PRGF) highlights Benin’s macroeconomic framework. All quantitative performance criteria (PC) and benchmarks for the period through end-December 2006 were observed, but one structural performance criterion and one structural benchmark were missed. Reform of the civil service pension fund is urgently needed. Benin’s newly issued Growth and Poverty Reduction Strategy Paper (GPRSP) places renewed emphasis on private sector-led economic growth.

Abstract

The staff report for the Second Review under the Three-Year Arrangement under the Poverty Reduction and Growth Facility (PRGF) highlights Benin’s macroeconomic framework. All quantitative performance criteria (PC) and benchmarks for the period through end-December 2006 were observed, but one structural performance criterion and one structural benchmark were missed. Reform of the civil service pension fund is urgently needed. Benin’s newly issued Growth and Poverty Reduction Strategy Paper (GPRSP) places renewed emphasis on private sector-led economic growth.

I. Introduction

1. Reversing a declining trend in the last three years, real GDP growth picked up in 2006, although the economy remains vulnerable to exogenous shocks. Under the current PRGF arrangement, the authorities are undertaking policies to accelerate the pace of economic activity and enhance the effectiveness of the poverty reduction strategy. Program performance has so far been mixed. While macroeconomic developments and prospects have improved, especially in the fiscal area, implementation of structural reforms has been patchy.

2. In March’s parliamentary elections, President Yayi’s allies won over 50 percent of the seats in the national assembly, giving the new cabinet, for the first since it was sworn into office last year, strong parliamentary support for reforms. Securing implementation of Benin’s long-stalled reform of the cotton, telecommunications and electricity sectors remains a key objective.

II. Program Performance in 2006

3. All quantitative performance criteria (PC) and benchmarks for the period through end-December 2006 were observed while one structural performance criterion and one structural benchmark were missed (Tables 1 and 2, MEFP). The missed structural PC and benchmark concern the introduction of consolidated electronic billing at the port of Cotonou and the preparation of a report on government debt to civil servants, respectively. To address delays in the port sector, the government has handed over management of reform to MCA-Benin. The authorities have also finalized and communicated to Fund staff the report on government debt to civil servants. As agreed under the program, the settlement schedule for this debt (CFAF 150 billion or 6 percent of 2006 GDP) is consistent with preservation of medium-term budget viability.1

III. Policy Discussions and Key Issues for 2007

A. The Macroeconomic Framework

4. Macroeconomic performance was broadly satisfactory in 2006, but somewhat weaker than expected under the program (Text Table 1 and Figure 1). Despite the government repaying long-standing debts to farmers, cotton output was lower-than-anticipated, due to fertilizer shortages and continued institutional weaknesses in the sector.2

Text Table 1.

Benin: Selected Macroeconomic Indicators, 2004-06

(Annual change; unless otherwise indicated)

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Sources: Benin authorities; and Fund staff estimates.

Percent of GDP excluding grants.

Payment order basis.

For 2004–05, 2005–06, and 2006–07 seasons, respectively.

However, food and other non-cotton agricultural production were strong. As a result, real GDP growth is estimated to have been only moderately below program projections notwithstanding frequent drought-related electricity shortages. Inflation exceeded the average in the WAEMU, exacerbated by shortages in parallel market oil imports from Nigeria where there were repeated pipeline fires. However, further real effective exchange rate appreciation was avoided; although the CFA franc (which is pegged to the Euro) continued appreciating vis-à-vis the dollar, inflation in some key trading partners, especially Nigeria, outpaced price increases in Benin. With cotton exports declining as a result of low production in 2005, and the growth of oil and capital goods imports remaining subdued, the external current account deficit (excluding grants) stabilized around 7 percent of GDP.

Figure 1.
Figure 1.

Benin: Recent Economic Developments

Citation: IMF Staff Country Reports 2007, 213; 10.5089/9781451803495.002.A001

Sources: Benin authorities; and Fund staff estimates and projections.

5. Economic growth appears set to continue in 2007. Early importation of fertilizers in March should contribute to rising cotton production and healthy activity in related transport and other services. With public investment considerably strengthening, and the global economic environment remaining generally favorable, real GDP growth is expected to rise to 4.5 percent. This is below the targeted 5.1 percent under the initial program, reflecting notably ongoing uncertainties regarding the supply of electric power in the region and energy costs. Medium-term growth has also been reduced somewhat to reflect delays in implementing structural reforms. In the absence of significant threats to food availability, inflation is projected to remain subdued around the 3 percent WAEMU target (Text Table 2 and Figure 2).

Text Table 2.

Benin: Selected Macroeconomic Indicators, 2007–09

(Annual change; unless otherwise indicated)

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Sources: Benin authorities; and Fund staff estimates and projections.

Percent of GDP excluding grants.

Payment order basis.

For 2007–08, 2008–09, and 2009–10 seasons, respectively.

6. The macroeconomic outlook for 2007 assumes an appropriate policy response to downside risks. The main risks relate to world cotton and oil price volatility, a difficult energy situation, and possible tensions in regional trade relations. To mitigate some of the risks, the authorities have negotiated electricity import deals with Nigeria and Ghana, pending privatization of SBEE; they are also taking steps to purchase electricity-generating turbines for the state-owned company. In the cotton sector, the authorities would reduce the producer price and accommodate a government subsidy, revenue developments permitting, in case of a large drop in world cotton prices. More generally, the government intends to forge ahead with its growth-enhancing reform agenda, which the authorities deem critical to addressing core economic vulnerabilities and strengthening business confidence.

Figure 2.
Figure 2.

Benin: A Looming Electricity Crisis, 2006–07

Long-lasting energy crisis may put medium and long-term growth at risk

Citation: IMF Staff Country Reports 2007, 213; 10.5089/9781451803495.002.A001

Sources: Benin authorities; and Fund staff estimates and projections.

7. The authorities initially expected real GDP growth to accelerate to over 6 percent in 2007, counting on an exceptionally strong increase in cotton production. However, with the latter likely to be much lower-than-initially anticipated, and in view of persistent difficulties in securing a durable solution to electricity shortages, they concurred with staff’s projection of a less robust overall economic expansion.3

B. Fiscal Developments, Policy, and Prospects

Fiscal performance in 2006

8. In 2006, the new government strengthened revenue mobilization and tightened expenditure controls, substantially improving the fiscal position (Box 1). Revenue increased by 0.3 percent of GDP, and domestically-financed outlays were contained below their 2005 level by 1½ percent of GDP. Consequently, net domestic financing of the budget was much lower than expected despite program aid falling short of expectations due to administrative delays in disbursements. Fiscal and debt sustainability was underpinned by debt relief under the MDRI.

Fiscal policy and prospects for 2007

9. The fiscal program for 2007 aims to increase pro-growth and poverty-reducing expenditures while preserving recent progress in medium-term budget consolidation.4 The program uses the fiscal space generated by MDRI relief and higher domestic revenue, and targets the elimination of the narrowly defined primary budget deficit, consistent with the PRGF arrangement. The 2007 budget is fully financed; budget support assurances have been received to cover an initial financing gap equivalent to 1.7 percent of GDP, from the European Union, IDA, and the African Development Fund5.

Benin: Revenue and Expenditure Developments in 2006

Total revenue is estimated to have reached 16.8 percent of GDP, exceeding program projections by 0.3 percent of GDP, mainly driven by a relatively comfortable customs revenue outturn. Customs administration improved in response to large-scale personnel changes in key positions to address governance concerns, further streamlining of clearance procedures, a more judicious use of the ASYCUDA ++ computer system, and better valuation and tax assessment of imports. The domestic tax general directorate on the other hand continued to face difficulties in managing corporate and VAT tax arrears and tax credits at the large- and medium-size taxpayer units.

On the expenditure side, as an April 2006 ban on spending through ad hoc Treasury payments orders (ordres de paiement Trésor) went into effect, the pace of spending considerably slowed. Most affected were domestically-financed investment outlays, with an execution rate of 57 percent. Priority sector spending further declined to 22.7 percent of total primary spending, from 24.1 percent in 2005; and the wage bill was contained below target. As a result, at 18.9 percent of GDP, total spending was nearly 3 percentage points below the program target. No new domestic payments arrears were accumulated.

10. In line with the above, total revenue and domestically-funded expenditure are projected to increase by ½ percent of GDP and ¾ percent of GDP, respectively. Envisaged revenue measures aim to achieve further improvement in customs and tax administration, including the rationalization of the activities of the large-tax-payer unit and the expansion of the fiscal agencies’ computer capacity (MEFP, paragraphs 12 and 13). Spending, especially the wage bill, remains under close control. To ensure adequate implementation of the pro-growth investment budget (IB), the authorities have set up special IB monitoring units in the technical ministries as well as in the Ministry of Finance.

11. The authorities concurred with staff on the realism of the key budgetary objectives for 2007 (Tables 1 and 2). They reiterated commitment to reinforcing the revenue-enhancing and expenditure-control measures in effect since the second quarter of 2006. Based on provisional fiscal data for 2007, optimism about the effectiveness of these measures appears justified. By end–February 2007, both the tax department and customs had mobilized some 80 percent of projected revenue for the first quarter of 2007. Also, total revenue exceeded program projections by a wide margin at end-March 2007, and was substantially higher than in the first quarter of 2006.

12. In the post HIPC/MDRI era, further strengthening of public expenditure management is essential to ensure adequate use of scaled-up available resources (Box 2). Drawing from the recommendations of a recent FAD TA mission, the authorities have initiated an operational audit of public finance information management systems (SIGFIP, ASTER, and WMONEY), to be completed before end-December 2007. The audit’s recommendations would feed into a PEM reform strategy scheduled to be finalized by end-March 2008 (a structural benchmark), and implemented with FAD technical assistance (MEFP, paragraph 21).

Weakened Public Expenditure Management Systems

Benin’s public finance information system (BPFIS) has two main components: SIGFIP and ASTER, the computer systems respectively for the budget department and the Treasury. The two systems are connected through an interface, but operational data exchanges between them are limited. As a result, BPFIS is, de facto, not fully integrated. The system’s coverage is not comprehensive either, with some key spending categories processed outside of SIGFIP, including the crédits délégués and ordres de paiement du Trésor.

Until recently, certain automatic expenditure control mechanisms were deactivated, and the system’s efficiency had considerably weakened. The authorities have reestablished BPFIS’s internal automatic controls, but more reforms are needed to improve expenditure monitoring from commitment to payment, and to ensure a more efficient tracking of payments floats and eventual domestic payments arrears.

13. Reform of the civil service pension fund is urgently needed. With an estimated annual deficit of ½ percent of GDP, the pension fund could grow into a significant threat to medium-term budget sustainability. Hence, the authorities will complete by end-December 2007 a reform strategy for the entity, including a timetable for an early implementation.

C. The Structural Reform Agenda

14. The authorities stressed their determination to implement structural reforms in the cotton, electricity, and telecommunications sectors, as well as in the port of Cotonou, however reducing state engagement is proving a much drawn out process. They noted that the March parliamentary elections provide the government with a strengthened mandate to pursue its reform agenda and confront social resistance to change.

15. Government disengagement from the cotton parastatal (SONAPRA) is to be completed in 2007, but some delays are being encountered. Due to delays in mobilizing needed technical assistance, completion of the physical assets audit, initially to be finalized in March/April 2007, will not be completed until June. As a result, state disengagement from the cotton parastatal (an end-June structural performance criterion) is postponed to November 2007—although this would still be in time for the new privately-controlled company to participate in cotton ginning activities for the 2007/08 season. World Bank staff and other representatives of the donor community in Cotonou deem that the proposed timetable revision is reasonable and does not alter the thrust of the macro-critical cotton reform program.

16. The government in consultation with World Bank staff now envisages an 18-month restructuring period for the electricity company (SBEE) to address severe financial weaknesses and help secure investor interest in the company.6 A revised reform timetable has been developed and communicated to Fund staff (a prior action for completing the review), and the authorities have appointed a new management team to carry out the SBEE restructuring agenda. As with the telecommunications company (Benin-Telecoms), bids for privatization are now scheduled to be launched before end-January 2009.

17. The government has handed over Port of Cotonou reform to MCA-Benin. The authorities installed critical computer software in the port’s centralized clearing and invoicing management system in October 2005, but operation of the new system has been delayed due to technical flaws, lack of adequate external assistance, and limited implementation capacity. Handing over reform to MCA-Benin provides assurances that the long-delayed port rehabilitation program will be given new impetus7. A study updating the customs reform agenda, including a related action plan, is to be completed before end-September 2007 (a structural benchmark). Proposed key measures could be included in program conditionality to gauge reform progress, going forward.8 MCA-Benin is also overseeing implementation of second-generation reforms aimed at improving the working of the land tenure and judicial systems, and facilitating credit access for small- and medium-scale enterprises. Feasibility studies for these second-generation reforms are under preparation.

D. Implementing the Growth and Poverty Reduction Strategy

18. Benin’s newly issued Growth and Poverty Reduction Strategy Paper (GPRSP) places renewed emphasis on private sector-led economic growth. The strategy seeks to enhance macroeconomic stability and promote private sector development; accelerate economic and export diversification; and encourage regional integration. Under its MDGs scenario, real GDP growth is projected to average over 7 percent during 2007-09, compared with 4.9 percent should required external assistance and structural reform progress fail to materialize. The GPRSP was submitted to donors at end-April 2007; Fund and World Bank staff have reviewed the document and issued a Joint Staff Advisory Note (JSAN)9.

19. The authorities’ goal is to raise Benin to emerging-economy status. Within a strong private-public sector partnership framework, they have underscored development and rehabilitation of economic and social infrastructure. The details of a Special Public Works Program (Program de Grands Travaux—PGT) under development have yet to be finalized. The mission encouraged the authorities to discuss the program’s financing requirements and potential sources of funding with Fund and World Bank staff, for appropriate policy guidance10. It also stressed the need to improve the private sector business environment if growth were to rise to a rate more conducive to reducing poverty (Box 3.)

IV. Program Monitoring and Risks

20. The authorities have requested completion of the second review. All applicable quantitative performance criteria have been observed; and a waiver is requested for nonobservance of one structural performance criterion (the operation of consolidated electronic billing at Cotonou port). Two prior actions for completing the review address delays in implementing structural reforms (MEFP, Table 1). All other program monitoring issues are discussed in the MEFP (paragraphs 29 and 30) and technical memorandum of understanding (TMU).

21. Beyond Benin’s vulnerability to exogenous shocks, the main risk to the program relates to the country’s historically weak structural reform record. This risk appears, however, to have lessened in view of the administration’s enhanced support in parliament, and should be viewed in light of the strength of the 2007 program, and the steps that have already been taken to strengthen revenue mobilization and enhance budgetary discipline. Also reassuring is the authorities’ reiterated commitment to take additional measures, as needed, to address eventual slippages in program implementation.

Benin’s Growth in Perspective

Even with some recent pick up, Benin’s growth rate remains below the average in sub-Saharan Africa and well below that in the dynamic economies of Asia. By creating a virtuous circle of growth, capital inflows, and strong exports, the latter have raised their percapita GDP significantly beyond Benin’s, despite starting with similar levels at the beginning of the 1990s.

Reducing poverty to half its 1990 level by 2015, as called for under the MDGs, is likely to require an acceleration of growth over the coming decade. Real per-capita GDP growth has averaged just 1.1 percent since 1990. While this has been associated with a significant decline in the proportion of Benin’s population living with less than one dollar a day, it nevertheless implies that a doubling of real income levels would take 63 years. Staff calculations suggest that real per-capita income growth may need to increase to an average of 1 ¾ percent per year over the next ten years for Benin to reach the MDG. But, it would have to accelerate to 5.9 percent for the level of per-capita GDP to increase to twice its 1990 equivalent.

V. Staff Appraisal

22. Benin’s macroeconomic performance remains broadly on track, although a number of constraints to growth ought to be addressed. The fiscal situation and shortterm growth prospects continue to improve. For further progress in 2007, authorities will need to ease the energy situation, help ensure adequate and timely provision of cotton fertilizers, effectively disengage from the cotton parastatal, and continue lessening tensions in intra-regional trade.

23. To advance more rapidly toward emerging-economy status and speed up poverty reduction, structural reforms need to be accelerated. With parliamentary elections concluded, the authorities need to consolidate recent gains in poverty alleviation by expediting the structural reform agenda. However, privatization of the cotton ginning company, an end-June structural performance criterion, is being postponed to November 2007, and the timetable for state disengagement from SBEE and Benin Telecoms has been set back to early 2009. The authorities have indicated that they would strictly adhere to the revised reform timetable. Nonetheless, this further delay is regrettable given that efficient operation of the cotton sector and steady availability of quality utility services are key to unlocking Benin’s economic competitiveness and potential. Any slippage from the latest timetable would put the program’s goals in question.

24. Staff welcomes MCA-Benin’s involvement in the reform of the port as well as the judicial and land tenure systems. The port plays a major role in the economy and it is vital to get its reform moving again. Second-generation reforms, including those seeking to facilitate credit access to small- and medium-sized enterprises, are needed to promote private sector development and permit diversification of the production and export base, thus enhancing the economy’s resilience to external shocks. Resolute implementation of related measures is critical.

25. A strengthening of Benin’s public expenditure management systems has become vital. It will ensure that potentially scaled-up resources in the post HIPC/MDRI era are put to best use. Thus, staff urges the authorities to expedite preparation of their PEM strategy, and to ensure its early implementation. It welcomes the steps the authorities have taken to improve execution and monitoring of the investment budget.

26. The authorities understand the risks to Benin’s PRGF-supported program. Staff urges them to continue to improve revenue mobilization while keeping spending at levels compatible with medium-term fiscal and macroeconomic viability, privatize public utilities, and reform the land tenure and judicial systems. It encourages them to take advantage of the government’s strengthened political mandate, and to intensify their open dialogue with other social partners with a view to strengthening acceptance of reform policies outside of parliament as well.

27. Staff recommends completion of the second PRGF review and supports authorities’ request for a waiver for the missed performance criterion. Handing over port reform to an external agency signals a new seriousness to address the implementation problems in this macro-critical area.

Table 1.

Benin: Main Economic and Financial Indicators, 2005–09

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Sources: Beninese authorities; and IMF staff estimates and projections.

The 2006 projections incorporate the MDRI resources for the IMF, IDA and AfDF in stock operations.

Cotton production for T-1/T season. Production of cotton seed in crop year T-1/T affects agricultural production in year T-1, while industry, services, and exports of ginned cotton in year T.

In percent of broad money at the beginning of the period.

Total revenue minus all expenditure, excluding interest due.

Total revenue minus all expenditure, excluding foreign-financed capital expenditure and interest due.

Interest payment only.

After HIPC relief and before MDRI.

Table 2.

Benin: Consolidated Central Government Operations, 2005–09

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Sources: Beninese authorities; and IMF staff estimates and projections.

The 2006 projections incorporate the MDRI resources for the IMF, IDA and AfDF in stock operations.

Payment orders curried over to the following fiscal year.

Total revenue minus total expenditure, excluding investment financed from abroad, interest payments and net lending.

Table 3.

Benin: Central Government Operations, Quarterly , 2007

(Cumulative value in billions of CFA francs)

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Sources: Beninese authorities; and IMF staff estimates and projections. 1/ The 2006 projections incorporate the MDRI resources for the IMF, IDA and AfDF in stock operations.

Total expenditure minus interest obligations.

Total revenue minus primary expenditure.

Total revenue minus primary expenditure excluding foreign financed capital expenditure and net lending.

Table 4.

Benin: Balance of Payments, 2005–09

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Sources: Beninese authorities; and IMF staff estimates and projections.

Incorporating the MDRI resources for the IMF, IDA and AfDF in stock operations.

Excluding reexports and imports for reexports, net balance of which is allocated between services and public transfers.

Official capital grants from the United States (MCA) of the amount of US $ 307 millions will be disbursed over the period 2006-2011.

The entry in 2003 is for the stock of debt operation at the HIPC completion point.

Table 5.

Benin: Monetary Survey, 2004–07

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Sources: BCEAO; and IMF staff estimates and projections.

Projections incorporate the effect of the cancellation of Fund credit under the MDRI.

Table 6.

Benin: Schedule of Disbursements under the PRGF Arrangement, 2005-09 1/

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Source: International Monetary Fund.

Assuming access equivalent to 10 percent of quota, or SDR 6.19 million.

Other than the generally applicable conditions under the PRGF arrangement, including the performance clause on the exchange and trade system.

Table 7.

Benin: Millennium Development Goals

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Sources: Benin’s authorities and World Bank estimates and projections.

Appendix—Letter of Intent

Republic of Benin

Ministry of Development,

Economy, and Finance

Cotonou, May 22, 2007

The Minister

To

Mr. Rodrigo de Rato

Managing Director

International Monetary Fund

Washington, DC 20431

Dear Mr. de Rato:

1. The government of the Republic of Benin is determined to provide fresh impetus to growth with a view to achieving significantly greater poverty reduction. The government’s aim is to transform the country into an emerging economy and, to that end, it is committed to consolidating recent gains in macroeconomic stability and making up for delays in implementing its ambitious structural reform agenda. In this context, execution of the government’s financial program under the Poverty Reduction and Growth Facility (PRGF) was broadly satisfactory in 2006.

2. Discussions with Fund staff on the second program review found that all but two of the quantitative and structural performance criteria and benchmarks for the period under review had been observed, and that remedial steps had been taken to ensure achievement of the program objectives pertaining to the missed structural performance criterion and benchmark in the future. These relate to the introduction of consolidated electronic billing (BFU) at the one-stop window of the port of Cotonou (a structural performance criterion for end-December 2006) and submission to Fund staff of an evaluation report on the government’s wage debt to civil servants (an end-December 2006 structural benchmark).

2. Delays in the reform of the port of Cotonou, including the effective start-up of the BFU, were due to lack of adequate technical assistance and limited local implementation capacity. To expedite implementation, the government has fully integrated port reform into the Millennium Challenge Account program supported by a grant from the United States. The government has also finalized a report on its wage debt to civil servants, and submitted it to Fund staff. In view of the corrective measures taken, the government is seeking both a waiver for nonobservance of the structural performance criterion on the BFU, and the completion of the second program review and disbursement of related PRGF resources.

3. Real GDP growth rebounded to 4.1 percent in 2006, and is expected to reach 4.5 percent in 2007, largely dependent on developments in agriculture, especially cotton, and in the services sector. In 2007, beyond a further increase in cotton production, economic activity is underpinned by a pick up in investment demand, and improvements in the competitiveness of the port of Cotonou. The government remains committed to its prudent macroeconomic policy stance. To accelerate the pace of economic activity and reduce poverty, it is endeavoring to further improve the business climate. In this perspective, continued IMF technical and financial assistance under the PRGF-supported program approved in August 2005 remains crucial.

4. The government consents to the publication of both the IMF staff report on discussions under the second PRGF review and related Memorandum of Economic and Financial Policies.

Truly yours,

Pascal I. Koupaki

BENIN Attachment I—Memorandum of Economic and Financial Policies for 2007

I. Introduction

1. The government is undertaking reforms to accelerate the pace of economic activity and address a slowdown in growth since the early 2000s. Subdued economic performance in recent years has resulted from delays in implementing structural reforms, particularly in the key cotton, electricity, and telecommunications sectors. It is also due to external shocks stemming from unfavorable international cotton and oil price developments. To boost growth and reduce poverty more effectively, the government is determined to accelerate economic reforms with International Monetary Fund (IMF) assistance under a Poverty Reduction and Growth Facility (PRGF)-supported financial program approved in August 2005.

2. This Memorandum reviews progress in program implementation in 2006 and broadly outlines the government’s economic and financial policy for 2007.

II. Recent Economic Developments and Program Performance
A. Economic Developments

3. In 2006, the downward trend in economic growth noted since 2003 was reversed, inflation moderated, and the current account balance stabilized. However, despite government efforts to restore confidence in the cotton sector notably by clearing various debts owed to small producers, real GDP growth of 4.1 percent fell short of the programmed 4.5 percent. This was due to the combined effects of lowerthan- expected cotton production, a slowdown in industrial activity as a result of intermittent electricity shortages, and insufficient supply of petroleum products. As inflationary pressures eased in 2006, reflecting improved food availability, the rate of inflation fell to 3.8 percent from 5.4 percent in 2005. Nonetheless, Benin’s inflation remained above the WAEMU average, driven by high international petroleum prices and insufficient supplies of energy products on the parallel market. The trade balance worsened due to a drop in cotton exports and a rise in imports of petroleum products through formal channels by SONACOP. However, it was offset by solid increase in unrequited transfers and program budgetary support. Consequently, the current account balance, excluding grants, stabilized at around 7 percent of GDP.

4. Growth of money supply remained strong, exceeding nominal GDP growth. Developments in monetary aggregates included a substantial increase in net foreign assets and a marked contraction of net bank credit to the government. The latter reflecting the positive impact of the MDRI and some increase in Treasury’s bank deposits. Debt relief, including bilateral debt cancellations, granted to Benin, a favorable trade balance in informal sector exchanges with the countries of the subregion, and financial support from development partners explain the strengthening of official foreign exchange reserves at end-2006, with gross reserves rising to the equivalent of about 15 months of imports. Growth of credit to the economy remained relatively high (9 percent) despite the increase in the required reserve ratio in mid-2005 and in the central bank’s policy rates in August 200611. Money supply grew substantially more than nominal GDP.

5. Budget execution featured higher revenues, lower expenditure in certain categories, and increased Treasury’s deposits with the banking system. As in 2005, government revenue rose by 9 percent in 2006 to reach 16.8 percent of GDP, or 0.3 percentage point above the program objective. This reflects a good performance of customs revenue due to: (i) improvements in internal governance through major personnel changes, (ii) more efficient use of computer technology, (iii) greater efforts to improve import valuation, (iv) stepped-up efforts to streamline customs clearance procedures, and (v) improved tracking of exemptions. Despite good performance of VAT and other taxes on goods and services, overall revenue collection by the Directorate General of Taxes and Government Property (DGID) fell slightly short of program expectations. Contributing factors include a decline in income tax revenue due to subdued economic activity in the previous year, continuing difficulties in managing accumulated tax credits, and limited efficiency of the tax administration, especially in the Large Taxpayer Unit (DGE) and the Medium-Sized Enterprise Tax Centers (CIMEs).

6. Current expenditure excluding transfers and investment spending were lower than programmed. Facing significant slippages in the first quarter of 2006, the government took steps to restore fiscal discipline. In particular, the government set up a cash flow committee to track revenue and expenditure more closely and to better align spending commitments with available government resources. Further, Treasury payment orders were used only on an exceptional basis. The measures led to reductions in both current and capital expenditure. The execution rate for the investment budget of 57 percent was too low to adequately support the government’s growth objectives. With the wage bill being contained within the budget limits, total expenditure amounted to 19.3 percent of GDP, lower than the programmed 21.5 percent of GDP, thus contributing to a primary budget surplus of 0.4 percent of GDP, compared to the programmed deficit of 0.9 percent of GDP. External budget support was below program expectation.

B. Program Implementation

7. All but one performance criterion for end-December 2006 were met. (Tables 1 and 2). The missed performance criterion, in the structural area, concerns the introduction of consolidated electronic billing at the port of Cotonou. Also, an assessment report on the government’s wage debt to civil servants, a structural bench mark, was not completed. Importantly, the government reiterated its determination to disengage from the cotton, electricity, and telecommunications parastatals, with technical assistance from the World Bank.

III. Economic and Financial Policies for 2007
A. Macroeconomic Framework

8. The authorities are determined to provide fresh impetus to growth to accelerate poverty reduction. Efforts are undertaken to transform Benin into a middleincome country To this end, the government is committed to preserve macroeconomic stability by considerably improving fiscal management. It is also determined to make up for delays in the implementation of key structural reforms.

9. Short-term macroeconomic prospects are generally encouraging. In 2007, economic growth is expected to reach 4.5 percent, driven by improvements in cotton sector performance resulting in part from privatization of SONAPRA’s factories. Economic activity would also be sustained by further competitiveness gains at the port and improved trade relations with Nigeria. Inflation is expected to remain under control and below the WAEMU convergence criterion of 3 percent. Despite increased imports of petroleum products and other capital goods, the current account deficit excluding grants is expected improve to 6.3 percent of GDP aided by a recovery in exports, including cotton.

10. The authorities will seek to mitigate uncertainties regarding the 2007 macroeconomic outlook. Risks include volatility in world oil and cotton prices, and insufficient energy supply. The government intends to take all steps to address domestic growth-impeding factors; it is especially committed to ensuring successful implementation of programmed reforms, particularly in the port and cotton sectors. Regarding the cotton sector, the government intends to penalize any activities likely to disrupt the supply of fertilizers and other inputs.

B. Fiscal Policy

11. The 2007 budget is in line with the government’s prudent fiscal policy and shows a marked redirection of expenditure toward pro-growth spending. The government is capitalizing on the fiscal space created by stronger public revenue collection and by debt cancellation under the MDRI. The 2007 budget is consistent with the macroeconomic framework under the three-year reform program supported by IMF resources under the PRGF.

12. Total revenue is to increase by around ½ percent of GDP to reach 17.2 percent of GDP. The revenue mobilization efforts will focus on: (i) a gradual elimination of the withholding income tax system (AIB) to normalize management of the related taxes; (ii) improvements in tax administration focusing on the DGE and CIMEs, whose jurisdictional thresholds have been revised to refocus their activities on tracking the activities of the largest taxpaying enterprises; (iii) introduction of the Single Taxpayer Identification Number by end-2007; (iv) elimination of the tax office at the port; (v) simplification and speeding-up of customs declaration and clearance procedures and extension of the ASYCUDA++ software to regional customs offices (program structural benchmark); (vi) strict tracking of tax and customs exemptions granted; and (vii) strengthening of the human and physical resources of the agencies.

13. DGID has made some amendments to tax legislation in 2007. Beyond measures to enhance the efficiency of the tax and customs administrations, the General Tax Code was changed to include the imposition of the VAT on advertisement services and introduction of a 5 percent withholding tax on fees paid to part-time teachers.

14. On the expenditure side, the investment budget has been strengthened and nonpriority disbursements will be strictly limited to support economic growth while protecting the fiscal targets of the program The government remains committed to limit wage payments within the relevant WAEMU convergence criterion. In addition, to safeguard achievement of the fiscal targets, the authorities intend to reduce nonpriority expenditure to offset any revenue shortfall that may occur during the fiscal year. Total expenditure is expected to reach 21.7 percent of GDP, of which 17.4 percent of GDP is to be financed using own resources. Outlays financed with domestic resources will increase by 12.7 percent in 2007, following a marked reduction in 2006.

15. Management of capital expenditure will be improved and the government will clear domestic payment arrears identified in 2006. Learning from the poor execution rate of capital expenditure in 2006, the government has set up administrative directorates within line ministries and at the Ministry of Finance in order to better monitor execution of the development budget. The Ministry of Finance has also taken steps to expedite the establishment of capital budget appropriations. These measures should help the government achieve a more orderly execution of domestically-financed capital outlays, in line with its pro-growth objectives. A recent audit certified CFAF 33 billion in domestic payment arrears to suppliers from FYs 2004 and 2005, which were identified in early 2006. These arrears are being cleared in 2007; including CFAF 10 billion in wage arrears to civil servants, total domestic arrears repayments are projected at CFAF 43 billion (1.6 percent of GDP).

16. Consistent with the above, a primary budget deficit (narrowly defined, commitment basis, excluding grants) would be avoided and the overall fiscal deficit (commitment basis, excluding grants) would be contained at CFAF 120.9 billion (4.5 percent of GDP). Taking into account the targeted net reduction in domestic payment arrears and identified net domestic and external financing equivalent to 4.4 percent of GDP,12 a residual financing gap equivalent to CFAF 44.8 billion (1.7 percent of GDP) remains. The gap is expected to be covered by: (i) CFAF 14.9 billion from the World Bank, (ii) CFAF 7.2 billion from the European Union, (iii) CFAF 12 billion from the African Development Bank, and (iv) CFAF 10.7 billion from bilateral partners.

C. Money and Credit

17. Monetary policy is conducted by the BCEAO at the regional level. The Bank intends to manage bank liquidity in a manner that ensures the provision of an adequate level of credit without weakening the zone’s external position. Broad money is projected to increase by about 5 percent in 2007. Credit to the private sector is set to rise about 11 percent, above the rate of increase of nominal GDP. Treasury securities of CFAF 54.2 billion, issued on the sub-regional financial market in January 2007, will be repaid over 2009–12.13 The annual payments of CFAF 14.8 billion on average will cover both principal and interest. An interest payment of CFAF 3.3 billion will, however, be made in 2008, at the end of accorded one-year grace period.

D. Balance of Payments and External Debt

18. The external position is expected to weaken in 2007. From a surplus of 4.7 percent in 2006, the balance of payments is projected to register a slight overall deficit. This reflects the combined impact of higher imports of capital goods and petroleum products on the back of sustained economic growth and persistently high petroleum prices, and dwindling MDRI financial benefits. The current account deficit, excluding grants, should nevertheless narrow slightly to 6.3 percent in 2007 from 7.1 percent of GDP in 2006 (Table 5.)

19. The external position is expected to remain sustainable in the medium term. Exports of cotton and various farm, food, and fisheries products are rising, while the performance of the services sector, including tourism, would strengthen. International reserves are projected to stand at around 12 months of imports in 2009. As a result of debt relief under the Enhanced HIPC Initiative and the MDRI and cancellation of Chinese and Russian debts, the external debt burden, estimated at 10.5 percent of GDP at end-2006, would remain below 13 percent of GDP in the medium term. The government is committed to pursue a prudent debt management policy and to neither directly contract nor guarantee any nonconcessional loans.

E. Structural Policies
Improvement in public expenditure management

20. The government is determined to further improve public expenditure management. Debt relief from the HIPC Initiative and the MDRI has reduced projected annual external debt service payments to 4.4 percent of total expenditure on average for 2007–09. Moreover, the mobilization of domestic revenue is expected to improve. To ensure best use of the resulting fiscal space, the government intends to address weaknesses in its public expenditure management system.

21. In collaboration with the African and Fiscal Affairs departments of the IMF, the authorities are developing a strategy to improve budget management. Finalization of this strategy, which has a particular emphasis on expenditure, by March 31, 2008 is a structural benchmark under the program. In the meantime, steps are being taken to restore order to public expenditure management. In this context, Treasury payment orders are now issued only in exceptional circumstances, the use of petty cash funds (régies d’avances) is strictly limited, and hitherto deactivated automatic controls in the computerized budget management system (SIGFIP) have been re-established and will remain in force permanently. By end-December 2007, the government will finalize an audit of Benin’s computerized expenditure management systems (SIGFIP, ASTER, and WMONEY), which is a structural program benchmark. Implementation of the audit’s recommendations is expected to ensure improved monitoring of expenditure commitments and execution.

22. The study of the government’s debt to its permanent employees has been finalized. The related arrears clearance plan is consistent with the government’s decision to maintain annual wage expenditure (including wage debt) at 6.2 percent of GDP on average over the medium term to preserve fiscal sustainability. As a prior for completing the PRGF review, the report on civil wage arrears was communicated to Fund staff on May 8, 2007. The government also intends to intensify preparation of the reform strategy for the National Pension Fund, whose operating deficit, growing by about 0.5 percent of GDP a year, imposes increasing pressure on the national budget. Completion of the strategy by end-December 2007, a structural benchmark under the program, would allow the authorities to implement it in 2008.

Privatization Program of the cotton, electricity, and telecommunications sectors

23. Government disengagement from commercial activities in the cotton sector is programmed to be completed by end-November 2007. In this context, the authorities are expected to complete a financial assessment of SONAPRA’s assets before end-June, with a view to ceding the ginning factories to a new cotton ginning company in November. The majority of the new company’s capital is to be held by private sector operators, workers, and other entities active in the cotton industry, with government retaining limited shareholding.

24. The government has reassessed its divestiture strategy for SBEE. In collaboration with World Bank staff, the authorities organized a technical workshop in January 2007 on the company’s predicament and prospects. Agreement was reached on restructuring SBEE over an 18-month period to address its most urgent technical and financial problems prior to privatization. Under the agreed strategy, government disengagement is to take the form of a lease concession. The government has set out a timetable for the restructuring plan’s key measures. Under the latter, the call for expression of interest from potential investors is expected to be issued in January 2009; finalization of the new reform timetable is a prior action for completing the second PRGF review. In this context, the government has put in place a team on secondment from the regional central bank (BCEAO) to improve SBEE’s financial, technical and administrative management practices.

25. The government has also appointed a team to develop a comprehensive reform strategy for the energy sector. Envisaged reforms would include implementation of an institutional framework that ensures efficient operation of the energy sector and promotes private sector investment in energy generation and transportation, with a view to addressing the ongoing energy crisis and improving economic competitiveness.

26. The authorities have initiated actions to improve the regulatory framework for the telecommunications sector. Key measures in recent months include the appointment of an interim regulatory authority (Le Conseil Transitoire de Régulation des Postes et Télécommunications), preparation of regulatory texts governing the sector, and creation of management initiatives aimed at improving the financial situation of Bénin Télécoms. A consortium comprising an investment bank, an audit firm, and a law firm has been appointed to assist the government in handling the Bénin Télécoms privatization transaction. In line with an October 2006 timetable, the government is to launch the call for expressions of interest to recruit the strategic partner by January 2009.

Port Sector Reforms

27. Reform of Cotonou Port has fallen behind schedule. Contributing factors include weak technical capacity for the government’s consultant and limited local capacity implementation. As a result, introduction of consolidated electronic billing (BFU) of port services, an end-December 2006 performance criterion, was not effected. To accelerate port sector reforms, these have been integrated into the Millennium Challenge Account (MCA) program. In that context, a comprehensive assessment study of the status of customs services, including the one-stop window, has been launched. The study is expected to identify reform measures aimed at achieving efficiency gains in the economic and revenue-raising functions of Benin's Customs, along with a timetable for implementation.

F. Growth and Poverty-Reduction Strategy Paper (GPRSP)

28. The government has submitted an updated PRSP (GPRSP, 2007–09) to its development partners. Drawing on experience from the 2003–05 poverty reduction strategy (PRS), the authorities had given a leading role to civil society and parliament in the preparation of the new PRS. Under the latter, the private sector is crucial to the efforts to promote strong and sustainable growth and fight poverty. The updated PRSP focuses on four priority growth-supporting areas: (i) macroeconomic stabilization; (ii) promotion and development of the private sector; (iii) diversification of the economic base; and (iv) promotion of regional integration. The final version of the GPRSP takes account of development partners’ observations on an initial draft of document.

29. The latest estimates of the poverty profile raise concerns. A modular, multi-round, survey of household living conditions (EMICOV) has been completed. Preliminary results from the first round suggest an 8-percentage- point increase in poverty between 2002 and 2006. However, survey results based on ‘conditions of life’ variables point to a modest decline in poverty over the first PRSP period, consistent with the evolution of per capita income and with Benin’s substantial reduction in inequality in recent years. The government intends to reassess and clarify the conflicting developments in poverty prevalence indicators.

IV. Prior Actions and Program Monitoring

30. Completion of the second review of the arrangement under the PRGF for Benin depends on two prior actions being implemented: finalization and transmittal to Fund staff of a study on the government’s wage debt to its permanent employees and its submission to Fund staff, and adoption of a revised timetable for the reform of SBEE.

31. Program monitoring will be based on quarterly structural and quantitative benchmarks and performance criteria (Tables 1 and 2). The authorities will report the data necessary for program monitoring to the IMF in accordance with the relevant Technical Memorandum of Understanding. During the program period, the government will not (i) introduce restrictions on payments and transfers on current international transactions or tighten any such restrictions without first consulting the Fund, (ii) introduce or modify multiple currency practices, (iii) conclude bilateral payments agreements not compatible with the provisions of Article VIII of the IMF’s Articles of Agreement, or (iv) introduce restrictions on imports for balance of payments purposes.

32. The third review of the arrangement under the PRGF will take place in mid-November 2007.

Table 1.

Benin: Quantitative Performance Criteria and Indicative Targets for the Period December 2006–December 2007

(In billions of CFA francs)

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The targets and performance criteria are cumulative as from end-December of previous year.

The ceiling on domestic financing will be adjusted pro tanto if the amount of disbursed budgetary assistance falls short of the program forecast up to a limit of CFA francs 10 and 18 billions at end-September and end-December 2006, respectively.

If external budgetary assistance exceeds the amount projected in excess of more than CFAF 3 billion, the ceiling will be adjusted downward by the excess disbursement beyond CFAF 3 billion, unless it is used to absorb domestic arrears.

This performance criterion is monitored on a continuous basis.

To be set at the third PRGF review.

Table 2.

Benin: Prior Actions, Structural Performance Criteria, and Benchmarks for 2007–08

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Attachment II—Benin: Technical Memorandum of Understanding May 22, 2007

1. This technical memorandum of understanding defines the quantitative and structural performance criteria and benchmarks for the program supported by the Poverty Reduction and Growth Facility (PRGF). It also sets out the frequency and deadlines for data reporting to the staff of the International Monetary Fund (IMF) for program-monitoring purposes.

I. Definitions

2. Unless otherwise indicated, the government is defined as the central government of the Republic of Benin and does not include local authorities, the central bank, or any other public entity with autonomous legal personality that is not included in the table of the government financial operations (TOFE).

3. The definitions of “debt” and “concessional borrowing” for the purposes of this memorandum of understanding are as follows:

  • (a). As set out in Point 9 of the Guidelines on Performance Criteria with Respect to Foreign Borrowing (Executive Board Decision No. 6230-(79/140), amended by Executive Board Decision No. 12274-(00/85) (8/24/00), debt is understood to mean a current, that is, not contingent, liability created under a contractual agreement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services at some future points in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debt can take a number of forms, the primary ones being as follows: (i) loans, that is, advances of money to the obligor by the lender on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans, and buyers’ credits) and temporary exchanges of assets that are equivalent to fully collateralized loans, under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers’ credits, that is, contracts where the supplier permits the obligor to defer payment until some time after the date on which the goods are delivered or services are provided; and (iii) leases, that is, arrangements under which property is provided that the lessee has the right to use for one or more specified period(s) of time, that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of this guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the arrangement, excluding those payments that cover the operation, repair, or maintenance of the property. Under this definition of debt set out above, arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

  • (b). A loan is considered concessional if, on the date the contract is signed, the ratio of the present value of the loan, based on the reference interest rates, to the nominal value of the loan is less than 65 percent (i.e., a grant element exceeding 35 percent). The reference interest rates used in this assessment are the commercial interest reference rates (CIRRs) established by the Organization for Economic Cooperation and Development (OECD). For debts with a maturity exceeding 15 years, the ten-year reference interest rate published by the OECD is used to calculate the grant element. For shorter maturities, the six-month market reference rate is used.

II. Quantitative Performance Criteria
A. Ceiling on Net Domestic Financing of the Government
Definition

4. Net domestic financing of the government is defined as the sum of (i) net bank credit to the government, as defined below, and (ii) net nonbank financing of the government, including the proceeds from the sale of government assets net of the cost of structural reforms to which these proceeds are earmarked, including government treasury bills issued in CFAF on the regional financial market of the WAEMU.

5. Net Bank credit to the government is defined as the balance between the liabilities and claims of the government vis-à-vis the central bank and commercial banks. The scope of net credit to the government is that used by the Central Bank of West African States (BCEAO) and is consistent with the established Fund practice in this area. It implies a broader definition of government than that specified in paragraph 2. Claims of the government include the CFA franc cash balance, postal checking accounts, subordinated debt (obligations cautionnées), and all deposits with the BCEAO and commercial banks of public entities, with the exception of industrial or commercial public entities (EPIC) and public enterprises, which are excluded from the calculation. Government debt to the banking system includes all debt to these same financial institutions.

6. The net bank credit to the government and the net amount of government treasury bills and bonds issued in CFAF in the regional financial market of the WAEMU are calculated by the BCEAO, and nonbank financing is calculated by the Beninese Treasury, whose figures are those deemed valid in the context of the program.

7. The ceiling on the net domestic financing of the government will be adjusted if disbursement of external budgetary assistance (excluding IMF financing and HIPC assistance) net of debt service obligations (excluding IMF repayment obligations) and payments of arrears, exceed or fall short of program forecasts. In the event of disbursement in larger than programmed amounts, the ceiling will be adjusted downward pro tanto by the excess disbursement, unless they are used to absorb domestic arrears. In contrast, if at the end of each quarter disbursements are less than the programmed amounts, the ceiling will be raised pro tanto by the amount of the shortfalls up to the limit (on a noncumulative basis) of CFAF 4.5 billion at end-June 2007, CFAF 10 billion at end-September 2007, and CFAF 18 billion at end-December 2007. The amount of external budgetary assistance provided is calculated from end-March 2007 onward. Budgetary assistance is defined as grants, loans, and debt relief (excluding project loans and grants, IMF resources, and debt relief under the enhanced Initiative for Heavily Indebted Poor Countries (HIPC Initiative) and the Multilateral Debt Relief Initiative (MDRI)).

Performance criteria and indicators

8. The ceiling on net domestic financing of the government is established as follows: CFAF -1.6 billion at end-June 2007, CFAF 5 billion at end-September 2007, and CFAF -4.1 billion at end December 2007. The ceiling is an indicative target as at end-September 2007 and a performance criterion as at end-June 2007 and at end-December 2007.

Reporting requirement

9. Detailed data on domestic financing to the government, including a detailed list of the bank account balances of other public entities, will be transmitted on a monthly basis within the four weeks following the end of the month. The definitive data will be provided within an additional four weeks after the provisional data have been reported.

B. Narrow Primary Fiscal Balance
Definition

10. The narrow primary fiscal balance is defined as the difference between total budgetary revenues (tax and nontax) and the budgetary expenses, less interests on the debt and capital expenditure financed by foreign grants and net loans.

Performance criterion

11. The ceiling on the narrow primary fiscal balance is established as follows: a surplus not lower than CFAF 12.9 billion at end-June 2007, a surplus not lower than CFAF 10.7 billion and a surplus not lower than CFAF 0.9 billion at end December 2007. The ceiling is an indicative target as at end-September 2007 and a performance criterion as at end-June and at end-December 2007.

Reporting requirement

12. Provisional data on the narrow primary fiscal balance, including the data generated by the computerized budget management system (SIGFIP), will be transmitted on a monthly basis within the four weeks following the end of the month. The definitive data will be provided within an additional four weeks after the provisional data have been reported.

C. Accumulation of New Domestic Payments Arrears on Government Obligations
Definition

13. Domestic payments arrears on government obligations are defined as outstanding debt owed by the government to residents due following the expiration of a 90-day grace period, unless specified otherwise, but not paid, and any financial obligation of the government verified as such by the government (including any government debt). The Caisse Autonome d’Amortissement (CAA-the government debt management agency) and the Treasury keep and update the inventory of domestic debt arrears on government obligations and maintain records of their payments.

Performance criterion

14. The government undertakes not to accumulate any new domestic payments arrears on government debt. For obligations other than government debt, the government undertakes not to accumulate arrears beyond six months. The non accumulation of domestic payments arrears will be monitored on a continuous basis throughout the program period.

Reporting requirement

15. Data on outstanding balance, accumulation, and repayment of domestic payments arrears on government obligations will be provided monthly within eight weeks following the end of each month.

D. Nonaccumulation of External Public Payments Arrears
Definition

16. External public payments arrears are defined as the sum of payments owed to non residents due and not paid on debt of the government and on external debt guaranteed by the government. The definition of “debt” provided in paragraph 3 applies here.

Performance criterion

17. Under the program, the government will not accumulate external payments arrears, with the exception of arrears arising from debt under renegotiation or being rescheduled. The performance criterion on the nonaccumulation of external public payments arrears will be monitored on a continuous basis throughout the program period.

E. Ceiling on Nonconcessional External Debt with a Maturity of One-Year or More Newly Contracted or Guaranteed by the Government
Definition

18. This performance criterion applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Borrowing (Executive Board Decision No. 6230-(79/140), amended by Executive Board Decision No. 12274-(00/85) (8/24/00), but also to commitments contracted or guaranteed (including lease-purchase agreements) for which no value has yet been received. The external debt excludes treasury bills and bonds issued in CFAF on the regional financial market of the West African Economic and Monetary Union.

19. The concept of “government” for the purposes of this performance criterion includes government as defined in paragraph 2, public institutions of an administrative nature (EPA), public institutions of a scientific and/or technical nature, public institutions of a professional nature, and local governments.

Performance criterion

20. Nonconcessional external borrowing and guaranteeing will be zero throughout the 2007 program.

Reporting requirement

21. Information on any borrowing (including terms of loans and creditors) contracted or guaranteed by the government shall be transmitted each month within four weeks following the end of the month.

F. Ceiling on Short-Term External Debt Newly Contracted or Guaranteed by the Government
Definition

22. The definitions in paragraphs 18 and 19 also apply to this performance criterion.

23. Short-term external debt is debt with a contractual term of less than one year. Importrelated loans and debt-relief operations are excluded from this performance criterion.

Performance criterion

24. In the context of the program, the government will not contract or guarantee short-term nonconcessional external debt.

25. As of December 31, 2006, the government of Benin has no short-term external debt.

II. Quantitative Indicators
A. Floor on Government’s Revenues
Definition

26. Government revenues are defined as those that appear in the government’s financial operations table (TOFE).

Indicative targets

27. Indicative targets for total government revenues are set at CFAF 204. billion at end-June 2007, CFAF 323 billion at end-September 2007, and CFAF 461 at end-December 2007 (cumulative since end-December 2006).

Reporting requirement

28. The government shall report its revenues to IMF staff each month in the context of the TOFE and before the end of the following month.

B. Ceiling on the Wage Bill
Definition

29. The wage bill includes all public expenditure on wages, bonuses, and other benefit or allowances granted civil servants employed by the government, the military and other security forces, and includes expenditure with respect to special contracts and other permanent or temporary employment with the government. The wage bill, therefore, excludes the salaries related to projects financed by foreign donors as well as the transfers related to the salaries of the teachers at the level of local municipalities.

Indicative targets

30. The quantitative benchmarks are defined as cumulative amounts after end-December 2006. The civil servant wage bill quarterly ceilings are CFAF 66 billion at end-June 2007, CFAF 110.3 billion at end-September 2007, and CFAF145.1 billion at end-December 2007 (Staff report, Table 3 and MEFP, Table 1).

Reporting requirement

31. The government shall report the wage bill to IMF staff each month in the context of the TOFE.

IV. Prior Actions for Completion of the Second Review

32. The authorities will have taken the following actions prior to the completion of the second PRGF review:

V. Structural Performance Criteria

33. The following action is set as performance criteria:

VI. Structural Benchmarks

34. The government will complete the following actions:

VII. Other Data Requirements for Program Monitoring
C. Public Finance

35. The government will provide to the Fund the following:

D. Monetary Sector

36. The government will provide to the Fund the following data on a monthly basis within eight weeks of the end of the month:

E. External Sector

37. The government will provide to the Fund the following data within 12 weeks of the end of each quarter:

F. Real Sector

38. The government will provide to the Fund:

G. Structural Reforms and Other Data Requirements

39. The government will provide to the Fund:
1

During 2007-08 annual wages and wage arrears payments are to average 5.4 percent of GDP and 0.4 percent of GDP, respectively.

2

The authorities cancelled a fertilizer distribution contract that had been awarded through an open-bidding process, and newly chosen importers were unable to supply quality chemicals in adequate quantity. The bidding process for the 2007/08 season was completed early in January 2007, and fertilizer imports launched in March; the government has undertaken to avoid any disruption to the supply of fertilizers or other inputs (MEFP para. 10), and government disengagement from the state-owned cotton parastatal should help remove political interference.

3

Preliminary estimates point to 2006/07 cotton output not exceeding 300,000 tons, which makes the government’s initial projection of close to 500,000 tons for the 2007/08 season difficult to achieve.

4

In 2007, priority sector outlays are projected to increase to the equivalent of 30.6 percent of total primary expenditures, from an annual average of 23 ½ percent during 2005-06.

5

Averaging 1½ percent of GDP annually, projected financing gaps for 2008 and 2009 should easily be covered with assistance from development partners.

6

SBEE’s net operating deficit amounted to CFAF1.2 billion (0.1 percent of GDP) in 2005, and the company reports losses of CFAF 6 per Kwh of thermal electricity marketed in the first quarter of 2006.

7

The MCA has pledged $307 million to Benin over 5 years, of which $169 million is devoted to port physical infrastructure development and institutional reform.

8

Consequently, an initial end-June 2007 benchmark on the submission of a port reform plan (Country Report 07/6)) was eliminated.

9

A recent household survey shows a modest decline in poverty based on “conditions of life” parameters, but suggests an increase in monetary poverty over the first PRSP period. Staff has urged the authorities to develop more robust poverty data in the next (PRSP) APR.

10

China is Benin’s largest emerging creditor with total claims currently estimated at 0.6 percent of GDP. In 2005, it accounted for over ⅓ of Benin’s exports and nearly 10 percent of imports. Chinese aid is mostly channeled to the infrastructure and health sectors.

11

In August 2006, the BCEAO raised policy rates for Benin by a quarter of a percentage point given developments on the international financial market, in particular the rise in ECB interest rates.

12

Including an expected CFAF 15 billion first tranche receipt for the privatization of SONAPRA.

13

This issuance was to refinance T-bills and retire short-term bank loans maturing in January, for a total amount of CFAF 36 billion.

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Cover IMF Staff Country Reports
Benin: Second Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver of a Performance Criterion: Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Benin
Author:
International Monetary Fund
Volume/Issue:
Volume 2007: Issue 213
Publisher:
International Monetary Fund
ISBN:
9781451803495
ISSN:
1934-7685
Pages:
69
DOI:
https://doi.org/10.5089/9781451803495.002
Figure 1.

Benin: Recent Economic Developments
Figure 2.

Benin: A Looming Electricity Crisis, 2006–07

Long-lasting energy crisis may put medium and long-term growth at risk